Wednesday 24 May 2017

The wounded Russian bear is still roaring for Western multinationals

Sweden’s Ikea is pressing ahead with plans to invest €2bn in Russia by 2020, adding to its 14 shopping centres by expanding into smaller cities with untapped potential
Sweden’s Ikea is pressing ahead with plans to invest €2bn in Russia by 2020, adding to its 14 shopping centres by expanding into smaller cities with untapped potential

Jason Bush

Western companies are sticking with Russia, waiting for an economic rebound that they expect will once again bring rich rewards, although some have cut operations to weather the slump.

Russia is expecting a steep recession this year, caused by low international oil prices and Western sanctions over the Ukraine conflict, even though international tensions have eased.

US carmaker General Motors is the highest-profile example of a Western company significantly scaling back its Russian operations, citing long-term challenges after a fall in sales.

But there have not been any major departures and others are still planning investment.

Typical sales of global manufacturers are expected to grow 6-8pc in rouble terms this year, despite the downturn. Sales rates of 12-18pc seen just two years ago are still fresh in executives' minds.

"For everyone its absolutely clear that this is a big market that will be back over time," said Alexander Ivlev, country managing partner for Russia at audit and consultancy firm EY.

The immediate prospects for Western companies in Russia are dim. Household spending is falling - bad news for multinationals, drawn by the large consumer market and an expanding middle class, which is now tightening its belt. Russian firms have also cut spending.

German industrial group Siemens has seen sales in Russia plunge by about half, Germany's 'Bild am Sonntag' reported, citing chief executive Joe Kaeser. Yet the company said it had no plans to curtail investments in Russia. Other global companies, such as Nestle and Mars, are also hoping to keep to their development plans. "We are doing everything we can to continue development despite the slowdown of the Russian economy. We are still confident in Russia's long-term prospects," Nestle Russia chief executive Maurizio Parnello said.

Nestle's sales in the Russia-Eurasia region rose 13pc last year in local currency terms to 86.4 billion roubles (€1.54bn).

And Sweden's Ikea is pressing ahead with plans to invest €2bn in Russia by 2020, adding to its 14 shopping centres by expanding into smaller cities with untapped potential.

"Our plans have not changed," said Konrad Grass, deputy retail manager for IKEA Russia. "The needs are the same in Russia as in the rest of the world: a nice kitchen, a nice bathroom, all the dreams and wishes as everybody else."

Daniel Thorniley, head of CEEMEA Business Group, a Vienna-based consultancy that researches multinationals in the region, said for a typical global manufacturer in Russia 2015 sales growth of 6-8pc in rouble terms is realistic - barring a re-escalation in the Ukraine conflict. That compares with growth of 12-18pc two years ago.

If the rouble remains stable in 2015 - or strengthens, as it has done so far this year - such a growth rate would translate into dollars or euros, which "would actually make Russia one of the best markets in the world for clients", he said. The Russian market also matters for multinationals because of its sheer volume - often accounting for as much as the rest of Central and Eastern Europe, including all other ex-Soviet states and Turkey, put together.

These high volumes translate into healthy profits even if sales disappoint, thanks to traditionally high "premium" prices charged in the country.

"Russia was a super-premium price market and high profitability. Now it's going to come down," Thorniley said. "But even if it comes down off those highs it might not be that bad."

Firms are biding their time while some may have already found that sanctions and the weaker rouble have provided new opportunities. "Companies are looking for the future and looking for the right moment," said EY's Ivlev.

Irish Independent

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